Smart tips to grow your money

If you really want your money to grow – stocks is the only way to go'- Haven't you heard this umpteen times. Well, it holds true every time.

The reason being that stocks have the potential to earn at a rate higher than the rate of inflation and thus generate actual savings for you!

Traditional investments like fixed deposits are good and safe and one must have a part of their savings invested in such risk free options. However, your portfolio is not complete and balanced in the absence of stock investments.

If invested wisely, you can minimize the risk of loss in stocks and increase the earning potential of your hard earned money.

Here are some statistics for you:

Nature of Investment	% Returns after 5 Years	% Returns after 10 Years
Real Estate	30%	14%
Gold	10%	7%
Bank FDs	8.50%	12.50%
Equity	35%	16%

As compared to fixed deposits, investments in equity will pay 26.5 percent higher returns in 5 years. Even for a longer term, investment in stocks pay higher returns even in comparison to real estate and gold.

To begin with, when you purchase equity in a company, you must ensure that the stock prices are reasonable.  If you over pay for stocks of a company, naturally you will have to wait longer to make profits on them.

This is because, if you buy stocks at a time when the prices are soaring at unreasonable levels, you will have to face an immediate setback when the market comes to normal levels, and the stock price drops to its average range. 

To understand if the stock price is reasonable, you have to understand how stock prices are determined. The price for a stock depends upon the demand for it amongst buyers. The base line of a stock price is its EPS (Earnings per Share).

The market price of a stock is generally a multiple of its EPS. The multiple depends upon the demand the stock fetches. Demand for the stock depends upon company's reputation, customer relations, financials, current news feeds, economic environment in general, political news, market sentiments etc.

If you are new to the stock market, it is best not to buy stocks when the market is influenced by a certain news feed as market sentiments prevail over logic at such times.

For example, the Sensex shot up in mid 2009 after the Congress led UPA Government was elected in the Parliament. Such price upheavals are temporary in nature.

A calm market is good for new investors.  If you are looking at stocks as an investment it is best to hold stocks for long term. Further, one should invest in good companies with sound management.

Investing in stocks for the long term

If you invest in stock of good companies for the long term, say 5 years, you will most likely earn good returns on your investment. This is because, a good company with a stable history and excellent growth charts, will grow over time.

Its EPS will also move in a forward direction as the company grows. Over time the demand for the shares will also increase and so will the PE multiple. Therefore, your initial investment will multiply over tie if you hold on to the stocks. Also, companies pay dividends and issues bonus shares. These factors add to returns.

Here is a sample of growth in share prices of reputed companies. Even if the prices have moved up and dipped from time to time, over the long run, the share prices have risen and investors have profited!

Share prices of Tata Steels (June 2005 – June 2010)

 Share prices of Infosys Technologies [ Get Quote ] (June 2006 – June 2010)

Option of investing through mutual funds

If you are vary of investing in stocks or are confused about the company where you should put your money, the option of mutual funds may be right for you.

This way you can invest in stocks of different companies, though indirectly, and gain the benefits of the stock markets without having to research stocks, study the market etc.

Fund houses have researchers and experts to study and analyse stocks.

You automatically have a diversified portfolio since mutual funds invest in multiple companies and different industries- this reduces the risk factor. Further you can make a modest beginning since most mutual funds are available for a small investment of Rs 5,000.

All you need to know about Portfolio Management Services

Portfolio Management Services (PMS) is a specialised service that offers a range of specialised investment strategies to capitalise on the opportunities in the market.

Investing requires knowledge, time and the right mind-set. This is besides constant monitoring. PMS gives you professional managers who strategise to deliver you consistent returns keeping your risk appetite in mind. Every portfolio manager has a well-defined investment philosophy and strategy that acts as a guiding principle.

PMS relieves the investor from all the administrative hassles of investments. You receive periodic reports on your portfolio performance and other aspects of your investments. Investments are tracked continuously to maximise returns.

In a PMS setup, your relationship manager defines your financial goals and advises you the right product mix. They give personalised service and ensure that you receive periodic updates and account performance reports.

Here are some of the most frequently asked questions about PMS, answered!

What are the advantages of investing in PMS vis-a-vis mutual funds? 
You have greater control over the asset allocation in PMS, whereas it is automatic in mutual funds. The portfolio can be customised to suit your risk-return profile.

The PMS portfolio manager also has relatively greater flexibility to move in and out of cash as and when required depending on the market view.

How can I introduce my initial corpus to portfolio management services (PMS)? The initial corpus can be brought into the PMS ambit by way of either cash and/or securities. The initial portfolio of securities will be re-aligned as per the desired investment model.

Does PMS guarantee the initial corpus and any return thereon?
Returns cannot be guaranteed as per regulations governing portfolio management services in India [ Images ].

What is the difference between discretionary and non-discretionary Portfolio Management Services?The discretionary portfolio manager will independently manage the funds of each client in accordance with the needs of the client. The non-discretionary portfolio manager will provide advisory services enabling the client to take decisions with regards to his portfolio.

Is the payment upfront?
Yes, payment is upfront.

Does portfolio management services have any lock-in period?
There is no lock-in period according as per regulations. But some companies may have a lock-in period depending upon their company polices.

What are the tax implications of investments in PMS?
Each PMS transaction is considered an independent trade and capital gains will be applied on each depending upon whether the relevant stock was held long-term or short-term. At present, 10 per cent tax is chargeable for short-term capital gains and no tax is chargeable on long-term capital gains. Securities transaction tax (STT) is also applicable.

What is the fee structure for PMS?
The fee structure depends from company to company. There may be many options such as:

• A fixed proportion of the fund amount (for eg 2 per cent of the initial corpus)
• A fixed proportion of the fund amount + variable depending upon the performance of the portfolio (2 per cent above 10 per cent of the returns)
• Variable depending upon the performance of the portfolio

Can I withdraw my profit any time?
It completely depends if your PMS has a lock-in period or not. If not, you can withdraw your profit as and when you want, provided you maintain the minimum ticket size. If you have a lock-in period, you will have to either wait till the end of the lock-in period or pay the exit load.

Protect your investments. Here's how !!

Anything done without proper planning will turn out to be a dud! This holds good for almost everything in life, from marriages to managing finances to running businesses.

Today, one of the most important things is managing finances. Going by recent trends almost everything else in your life hinges more on one huge binding factor called money!

Believe it or not, making money is no big deal, neither saving it nor cutting down on your expenditure for that matter. These are all important but above everything is mastering the art called investment!

It is the only sure way you could build on your wealth and protect it. Investment is a science. And a wise investment is about choosing the right scheme based on certain underlying principles and algorithms.

And unless we do our home work right even the effective steps of the regulators will not help us. So, let us see what it takes to turn into a smart and wise investor that will help you protect and multiply your investment!

To begin with, know your goal

Perhaps the first point to consider before investing in a financial product is to understand your goal! Are you looking at the investment for the long term or short term?

For instance, never invest in a product like Unit Linked Insurance Policy (ULIP), a long term product, if you have plans to surrender it after paying the premium for the mandatory first 3 years called the lock-in period in industry parlance!

When you finally decide on the nature of the investment scheme it is better to do a comparison of the similar products available in the market. Do not give in to selling pressure. After all, it is your money and investment.

Be disciplined

Don't try to do things that are really outside your purview, portfolio management for instance. Approach your financial consultant or a fund manager for expert guidance on these issues.

These areas and things like timing the market are expert zones that requires years of experience to understand and practice and not like simple investment methods like the public provident fund.

Also, misunderstanding does as good as not knowing a product at all and probably even worse! Just one ore two instances of making accidental profits don't put one anywhere in the vicinity of financial disciplines.

Proper asset allocation is important

Allocation of assets in a portfolio is very, very important. Simply put, it is deciding about the mixture of stocks, bonds, real estate, derivates and mutual funds you want to hold in your portfolio.

The fact is that most asset allocation is ad hoc but aims to minimize risk. Asset allocation begins with considering your objectives. This is perhaps one area where even the most seasoned investor might go wrong. Though there is no select formula for a perfect asset allocation, you can still try to do a few things that could help you build a safe portfolio.

Firstly, weigh the difference between risk and returns. For example, investors willing to take a higher risk should allocate more money into stocks. Do not fully rely on planner sheets.

Find out the real cost of your investment from the company. Timing is also important, the earlier you start the better but do consult an expert before you implement it.

Watch out for costs

The one area which many investors fail to decode is the breakup of the costs involved in an investment. Failing to see the hidden costs such as the brokerage costs particularly in a mutual fund or a life insurance company could actually hurt you real hard.

Mutual fund companies often subtract fees from your portfolio known as fund's expense ratio before their annual results are announced. These are expenses paid to the advisor as fees, marketing efforts, legal expenses and accounting and auditing costs.

According to statistics, every year on an average, the expense ratio for a U.S stock fund is roughly between 1 and 1.5 per cent. Apart from this there are other hidden costs like trading costs involved. Learn about the impact of this break up on your investment.

Fund managers often churn their portfolios to whopping per centages thus putting your investment at a higher risk by making your yield fall far below the index return.

Hence, as an investor it is very important for you to keep a watch on all costs, including the fund manager cost, churning cost and other associated costs.

Do you know where to invest your money ??

 How many of you can confidently say that you are well aware of all the investment avenues available? Not all. There is a plethora of investment options available in the market today. But then the options must be selected based on the goals you want to achieve in life and the time frame in which you want to achieve it.

Let us take a trip down the different paths of investment world.

This is the first part where in we will explore different options available under equities:

Equity

I guess one of the most talked about asset class in recent years. So what is equity investment? It refers to buying and holding of shares or stocks in a stock market by an individual and funds in anticipation of income by way of dividend and capital gain as the value of the stock rises. Equity investment is a good form of long-term investments. There are various ways of investing in equity:

Direct investment: Refers to buying and selling (trading) in the stocks or shares on the exchange. In order to trade you need to have a demat account. As for trading you need to register with a broker or you can have an online trading account which is linked to your demat account and your bank account through which you can trade.

This form of investment in equities is for investors who regularly follow the stock market. Investors who are looking for developing long-term wealth should not indulge in speculative trading (buying and selling within a short span of time). Also investments in stocks or scripts should not be done based on tips that you have received from your friendly neighbor or relatives.

Investment should be done after a thorough analysis of the company, sector, and industry on the whole. We have heard many stories where people have lost their entire wealth by investing based on tips. Also do remember, one can never time the market. So be careful when you are investing directly.

Portfolio management services (PMS): In return for a fee, trained professional portfolio managers allocate your assets in various asset classes depending upon your personal investment goals and risk preferences. PMS is not restricted to only investing in equity and equity mutual funds. They also include investment in bonds. The advantage of this form of investment: professional expertise for your hard earned money, transparency and flexibility. You do not have to overlook in the day-to-day management. You are given an online user name and password that grants you an online access to your portfolio that keeps you up to date. The fee structure can also be selected either on performance or on a fixed basis.

The disadvantages: the minimum requirement for PMS is generally very high, that is., most of the PMS are offered where the portfolio offered to manage is at least Rs 25 lakh. The fee charged is also high. Generally losses are not shared when you opt for performance-based fees. This form of investment is especially good for high net worth individuals who have money but no time to monitor them.

Equity mutual fund: Mutual fund is the latest buzzword. After the debacle of US 64, the mutual fund industry took many years to get their act together. But now with stricter norms set by SEBI and more transparency mutual fund industry has developed in a big way. With more than 500 funds there are options available for each and every investor. Also, with investment of as low as Rs 1,000 (for systematic investment plan) and Rs 5,000 (lump sum investment) this form of investment attracts one and all.

So what is a mutual fund? A mutual fund is professionally managed collective investment scheme that pools money from many investors and invest it in stocks, bonds and various others securities and instruments. Mutual funds are divided into open ended and closed ended mutual fund.

Open-ended fund: Are funds in which you can buy or sell on any business working day. Just like shares value, mutual funds have net asset value on which you buy or sell your units. Unlike shares in mutual funds, units are allocated to an investor for the amount invested.

Closed-ended fund: Is a collective investment scheme where limited a number of units are allocated. New units are not allocated on a day-to-day basis. Generally closed-ended funds are traded on the exchange and one can trade their units on the exchange.

In this section, we will have a look at various forms of open-ended equity mutual funds. Equity mutual funds are sub-divided into:

Diversified equity mutual fund: A kind of mutual fund which invests in stocks of various companies of various sectors. Best bet to park your funds in.

Sector funds: Mutual fund whose investment objective is to invest stocks of companies of a particular sector like automobiles, pharma, banking, infrastructure and others. This type of fund can be risky if the sector does not perform well. So limit your exposure to sector funds.

Index fund: A type of mutual fund with a portfolio constructed to match or track the market index. It is relatively passive fund with broad market exposure and low operating cost.

Tax savers or equity linked saving schemes (ELSS): They are same like diversified mutual fund. The difference is investment in these funds have tax benefit up to Rs 1 lakh as it is exempted under section 80C. Also, ELSS has a three year lock-in period. Any withdrawal before this period means that you will not get the tax benefit under section 80C. Do keep in mind the risk factor while opting to invest in ELSS. Also, select growth or dividend payout option but not dividend reinvestment as dividend reinvestments go into the lock in period loop.

Why select mutual fund? Here's why. Low minimum investment amount, low management cost, low investment, professional management, diversification, liquidity and with entry load removed from August 1, 2009 make them all the more attractive.

Disadvantage of mutual fund: Backend load or exit load if investment redeemed within six months to one year. Many funds have high operating charges, decision-making is in someone else's hands and no tailor made portfolio.

The pros outweigh the cons and hence equity mutual funds form a very attractive form of investments. Mutual funds are especially for investors who do not have the time to follow the market and also who cannot shell out huge amounts. It is advisable to do a SIP in mutual funds as power of compounding and cost averaging works wonders to your hard earned money.

Derivative refers to a variable that has been derived from another variable. They have no value of their own. They derive their value from some underlying asset. For example a derivative of a share of Reliance Industries will derive its value from the share price of Reliance. Derivatives are specialised contracts wherein an agreement or an option to buy or sell the underlying asset of the derivate up to a certain time in the future at a pre-arranged price which is known as exercise price. The contract has a fixed expiry period between 3 to 12 months.

The value of the contract depends on the expiry period and on the price of the underlying asset. The underlying asset in derivative trading can be financial assets like shares, index, currency or can be commodities like soyabean, oil and others. We will right now be looking only at financial derivative trading whose underlying asset is equities.

The different forms of derivative contracts are:

Futures and forwards: Futures contract give the holder the opportunity to buy or sell the underlying asset at a pre-specified price some time in future. These contracts come in standardised format with fixed expiry date, time contract size and price. Forwards are similar contracts like future but the size, expiry date and price are customised as per the needs of the user.

Options: It is a contract that gives the buyer the right, but not the obligation, to buy or sell an underlying asset (it maybe an index or a stock) at a specific price on or before a certain date. The right to buy an underlying asset is known as call option. The right to sell the underlying asset is known as put option.

Financial derivative contract can be bought or sold by paying a premium. The upside in a derivative contract is unlimited. But again if you are a buyer of an option, your downside is limited up to the extent of the premium amount paid (Note: The seller of an option has an unlimited loss potential).

Futures and forwards too have an unlimited loss potential.

The advantages are you need to pay only 20 to 30 per cent of the contract price. You also have the option to first sell the lot of stocks and then buy them within the stipulated time. This is only possible in normal equity trading if you are an intra-day trader.

The disadvantage is there is a time frame to the contract. Not all the stocks are available in derivatives trading. Finally they are complicated and extremely risky.

Only investors who have a thorough knowledge of derivative trading and who can regularly follow the stock market should trade in them. It is not for investors who are looking to develop long-term wealth.

Who should be investing in equities?

Investors whose goals are long term, that is, more than seven years can invest comfortably in equities. As aptly said by Warren Buffet: If, when making a stock investment, you're not considering holding it at least ten years, don't waste more than ten minutes considering it.

If you want to achieve any of your goals in less than this time frame then equity is not the vehicle for you. Remember that emotions like greed and fear should have no place when investing in equities. Otherwise debt is the avenue for risk-averse safe fixed income generation.

How well do you know your Mutual Fund Basics ??

A mutual fund (MF) is a professionally managed type of collective investment scheme that pools money from many investors, that is, your money and invests it in stocks, bonds, short-term money market instruments, and/or other securities to yield returns. If you are apprehensive of investing in the stock market because of its unpredictability, play relatively safe with MFs.

You will receive units of the MFs in proportion to the money put in. The value of each unit is also impacted when management fees and other expenses are deducted from the overall pool of funds.

The value of a unit is called the Net Asset Value (NAV) of the MF which changes on a daily basis.

Investors who wish to purchase or sell units of a mutual fund after the scheme is fully functional must do so at a price that is linked to the NAV or the Net Asset Value.

Here are 12 important facts you should know about MFs.

1. How is the Net Asset Value calculated?

The Net Asset value (NAV) = (Market value of the fund's investments + Receivables + Accrued income Liabilities - Accrued expenses)/Number of outstanding units.

2. What is a Systematic Investment Plan?

A systematic Investment Plan or SIP is an investment strategy wherein you can invest into a mutual fund at specific intervals over a defined time frame. You can select the investment frequency for your chosen SIP, either monthly or quarterly.

Since a fixed amount is invested on a regular basis, you get more number of units in a falling market and fewer units when the market is on the rise.

This will also help you to smoothen out the market fluctuations and the investment will be low cost investment over a period of time. This strategy of investing is also called Rupee Cost Averaging.

3. What is Systematic Withdrawal Plan (SWP)?

The systematic Withdrawal Plan (SWP) is a facility available to the investor to withdraw funds at regular intervals.

4. Are there any sector-specific funds or schemes?

There are some sector specific schemes. Some funds/schemes invest in the securities of only those sectors or industries as specified in the offer documents. It could any sector such as pharmaceuticals, software, fast moving consumer goods (FMCG), petroleum stocks, etc. In such schemes, the returns are dependent on the performance of the respective sectors/industries.

These sector-specific schemes may give higher returns, but the investment in such schemes is riskier compared to diversified funds. As an investor, you need to be vigilant and keep an eye on the performance of the specific sectors/industries. In such schemes, it becomes extremely important for you to exit at an appropriate time. You may also need to consult an expert regarding these investments.

5. Are investments in mutual fund units safe?

Any stock market investment is inherently risky. Different funds have different risk profiles that are clearly specified in their objectives. Funds that are low risk invest generally in debt, which is safer than equity investments. Mutual funds have access to services of expert fund managers another assurance to the investor that your money is in good hands.

6. How much should I invest in debt or equity-oriented schemes?

As an investor, you should take into account your risk-taking capacity, age, financial position, etc. Schemes invest in different type of securities as disclosed in the offer documents and offer different returns and risks. You may also consult financial experts before taking decisions. Agents and distributors may also help in this regard.

7. How do I fill up an application form of a mutual fund scheme?

You are required to mention clearly your name, address, number of units applied for and other relevant information as required in the application form. Also provide a bank account number to avoid any fraudulent encashment of any cheque/draft issued by the MF at a later date for dividend or repurchase. It is important to make sure that the MF company is apprised of any change in your address, bank account number, etc.

8. Can mutual fund units be purchased after the cut-off time?

To be able to get the NAV of the same day, you must purchase the MF units inside the cut-off time of that scheme. Delay on this part will mean that you will only get the next day's NAV. Also, if the next day happens to be a holiday, the NAV of the next working day will be applicable.

9. Under which sections of the Income Tax Act can tax benefits for investing in mutual fund units be claimed?

Dividend income from MF units is exempt from income tax with effect from July 1, 1999. Investors can claim tax rebate under section 88 of Income Tax Act, 1961 with investments in Equity Linked Saving Schemes (ELSS). Tax benefits will also be available under section 54EA and 54EB with regard to relief from long-term capital gains (LTCG) tax in specific schemes.

10. When does an investor get a certificate or statement of account after investing in a MF?

Mutual funds are required to send out certificates or statements of accounts within six weeks from the date of closure of the initial subscription of the scheme.

In case of close-ended schemes, the investors can get a demat account statement or unit certificates as these are traded in the stock exchanges. In case of open-ended schemes, a statement of account is issued by the mutual fund within 30 days from the date of closure of initial public offer of the scheme. The procedure of repurchase is mentioned in the offer document.

11. How long does it take for transfer of units after purchase from stock markets in case of close-ended schemes?

Securities and Exchange Board India (SEBI) regulations require that transfer of units be done within thirty days from the date of lodgment of certificates with the mutual fund.

12. Is there a body that handles investor complaints redressal?

The name of contact person to approach for queries, complaints, or grievances is mentioned in the offer document. Trustees of a mutual fund also monitor the activities of the mutual fund. The names of the directors of asset management companies and trustees are also given in the offer documents.Investors can also approach SEBI for redressal of their complaints. Once the complaints are received, SEBI takes up the matter with the concerned mutual fund and follows up with them till the matter is resolved.

HAPPY INVESTING !!